Accounting Standard - AS 11

The Effects of Changes in Foreign Exchange Rates

Objective

Enterprises carrying on Activities involving Foreign Exchange

Transactions in Foreign Currencies ($) Foreign Operations

Translation of $ into the Enterprise’s Reporting Currency

To Include in the Financial Statements of Enterprise

to

Principal issues in

accounting

Which exchange rate to use?

How to recognise in Financial Statements the financial effect

of changes in exchange rates ?

Scope Accounting for transactions in

foreign currencies. Translating the financial

statements of foreign operations. For transactions in the nature of

Forward exchange contracts.

Presentation in a cash flow statement (AS-3).

Restatement of financial statements from its reporting currency into another currency for the convenience of users.

Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs (AS-16).

This Standard does not specify the currency in which an

enterprise presents its financial statements. However,

an enterprise normally uses the currency of the

country in which it is domiciled.

If it uses a different currency, this Standard requires

disclosure of the reason for using that currency. This

Standard also requires disclosure of the reason for

any change in the reporting currency

Some Important Terms...

Closing rate is the

exchange rate at the

balance sheet date.

Exchange rate

is the ratio for exchange

of two currencies.

Exchange difference is the

difference resulting from reporting the

same number of units of a foreign currency in the

reporting currency at

different exchange rates.

Fair value is the amount for

which an asset could be

exchanged, or a liability settled,

between knowledgeable, willing parties in an arm’s length

transaction.

Foreign operation is a

subsidiary, associate, joint

venture or branch of the

reporting enterprise, the

activities of which are based or conducted in a country other

than the country of the reporting

enterprise.

Integral foreign operation is a

foreign operation, the

activities of which are an

integral part of those of the

reporting enterprise.

Forward

exchange

contract means

an agreement to exchan

ge differen

t currencies at a forward

rate.

Forward rate is the

specified

exchange rate

for exchange of two

currencies at a specified future

date.

Monetary

itemsare

money held and

assets and

liabilities to be receive

d or paid in fixed or determi

nable amount

s of money.

Reporti

ng currenc

yis the

currency used

in presenting the financia

l stateme

nts.

FOREIGN CURRENCY TRANSACTION

A transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an enterprise

either:

buys or sells goods or services whose price is denominated in a foreign currency

borrows or lends funds when the amounts payable or receivableare denominated in a foreign currency.

becomes a party to an unperformed forward exchange contract;

or

otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency

Initial Recognition

Foreign Curren

cy Amoun

t

Exchange Rate at the date of transac

tion

Amount in

Reporting

currency.

For practical reasons, a rate that approximates the actual rate at thedate of the transaction is often used, for example, an average rate for a

week or a month might be used for all transactions in each foreign currencyoccurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

At Subsequent Balance Sheet Dates

31.03.20XX

Monetary Items

Foreign

Currency

Amount

Closing Rate

Amount in

Reporting

currency.

Cash, receivables, and payables are examples of monetary items.The contingent liability denominated in foreign currency at the

balance sheet date is disclosed by using the closing rate.

However, in certain circumstances, the closing rate may not reflect

with reasonable accuracy the amount in reporting currency that is

likely to be realised from, or required to disburse, a foreign

currency monetary item at the balance sheet date, e.g., where

there are restrictions on remittances or where the closing rate is

unrealistic and it is not possible to effect an exchange of currencies

at that rate at the balance sheet date. In such circumstances, the

relevant monetary item should be reported in the reporting

currency at the amount which is likely to be realised from, or

required to disburse, such item at the balance sheet date.

Non-Monetary ItemsWhen Valued

At Historical Cost

Rates at the date of the transaction

At Fair Value

Rates that existed when the values were determined

Fixed assets, inventories and investments in equity shares are examples of non-monetary items.

Recognition of Exchange Differences

Exchange differences arising on settlement of monetary items or

reporting an enterprise’s monetary items , at rates different

from those at which they were initially recorded during the

period, or reported in previous financial statements, should be

recognised as income or as expenses in the perio d in which

they arise, with the exception of exchange differences dealt

with non integral financial operations.

Net Investment in a Non-integral Foreign Operation

Exchange differences arising on a monetary item that, in substance,

forms part of an enterprise’s net investment in a non-integral

foreign operation should be accumulated in a foreign currency

translation reserve in the enterprise’s financial statements until

the disposal of the net investment, at which time they should be

recognised as income or as expense.

Financial Statements of Foreign Operations

The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to the reporting enterprise.

Financial OperationsIntegral Operations Non Integral Operations

• Extension of the reporting enterprise’s operations.

• In such cases, a change in the exchange rate between the reporting currency and the currency in the country of foreign operation has an almost immediate effect on the reporting enterprise’s cash flow from operations.

• Therefore, the change in the exchange rate affects the individual monetary items held by the foreign operation rather than the reporting enterprise’s net investment in that operation.

• In contrast, a non-integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and perhaps arranges borrowings, all substantially in its local currency.

• There is little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the reporting enterprise.

• The change in the exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the individual monetary and non-monetary items held by the non-integral foreign operations.

Determining a Non Integral Operation

While the reporting enterprise may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting enterprise;

Transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities;

The activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise;

Costs of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency rather than in the reporting currency;

Determining a Non Integral Operation

The foreign operation’s sales are mainly in currencies other than the reporting currency;

Cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation;

Sales prices for the foreign operation’s products are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation;

There is an active local sales market for the foreign operation’s products, although there also might be significant amounts of exports.

TRANSLATION

OF

FINANCIAL STATEMENTS

Tangible Fixed Assets (Cost & Depreciation)•Exchange rate at the date of purchase of the asset or, if the asset is carried at fair value or other similar valuation, using the rate that existed on the date of the valuation.

Inventories•Exchange rates that existed when those costs were incurred•The recoverable amount or realisable value of an asset is translated using the exchange rate that existed when the recoverable amount or net realisable value was determined•The rate used is therefore usually the closing rate.

Translation of an integral foreign operation should be as if the transactions of the foreign operation had been those of the reporting enterprise itself.

Assets and Liabilities• Both monetary and non-monetary, at the closing

rate.

Income and Expense Items• At exchange rates at the dates of the transactions.

All resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment.

In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements, the reporting enterprise should use

the following procedures:

Disposal of a Non-integral Foreign Operation

The cumulative amount of the exchange differences which have been deferred and which relate to that operation should be

recognised as income or as expenses.

Forward Exchange Contracts

• In case of a forward exchange contract with regard to a foreign exchange

transaction other than liabilities incurred for acquiring fixed assets:

– Difference between the forward rate and the exchange rate at the date

of the transaction should be recognised as income/expense over the life

of the contract, any profit or loss on cancellation or renewal should be

recognised as income/expense for the period.

– If the forward exchange contract relates to liabilities incurred for

acquiring fixed assets such difference should be adjusted in the carrying

amount of the respective fixed assets

Disclosure

• The amount of exchange differences included in the net profit or

loss for the period; and

• net exchange differences accumulated in foreign currency

translation reserve as a separate component of shareholders’

funds, and a reconciliation of the amount of such exchange

differences at the beginning and end of the period.

When There Is A Change In The Classification Of A Significant Foreign

Operation, An Enterprise Should Disclose:

(a) the nature of the change in classification;

(b) the reason for the change;

(c) the impact of the change in classification on shareholders’ funds;

(d) the impact on net profit or loss for each prior period presented

had the change in classification occurred at the beginning of

the earliest period presented.

* The effect on foreign currency monetary items or on the financial

statements of a foreign operation of a change in exchange rates

occurring after the balance sheet date is disclosed in accordance with

AS 4, Contingencies and Events Occurring After the Balance Sheet Date.

* Disclosure is also encouraged of an enterprise’s foreign currency

risk management policy.

Tax Eff ects of Exchange Diff erences

Gains and losses on foreign currency transactions and exchange

differences arising on the translation of the financial statements of

foreign operations may have associated tax effects which are

accounted for in accordance with AS 22, Accounting for Taxes on

Income.

THANKYOU!